Asian resource M&A activity to increase by 2012 - Fitch
The rating agency says supply chain integration and greater control of raw materials by end users such as China and India is expected to grow.
Author: Geoff Candy
Posted: Tuesday , 06 Oct 2009
GRONINGEN -
mineweb.com
The level of merger and acquisition activity between Chinese commodity companies and their western counterparts is likely to increase over the next three years.
This is according to a report by Fitch Ratings, which examines the changes expected from corporates in the Asia-Pacific region in 2012.
The group notes, "As leading players in the key Asian markets look to expand their businesses and diversify away from their domestic markets, Fitch expects to see a meaningful increase in outward cross-border M&A activity by 2012, notably in the commodities and energy sectors, as China - in particular - seeks to secure the natural resources necessary to support its continuing strong growth."
It also expects China's share of global commodities demand to increase at the expense of countries like Japan. "Particularly," it says, "for industrial commodities such as iron ore and coking coal".
This is a trend that is beginning to take shape if one considers the number of deals taking place in the space already - from aborted attempts to partner with Australian firms such as Lynas (China Nonferrous Metal Mining group) and Rio Tinto (Chinalco) to the recent hostile takeover attempt for Canadian Royalties by Jilin-Lien Nickel Industry.
But, Fitch maintains it is a trend that will increasingly see end-user nations such as China and India taking ownership of more of the raw materials.
It adds, "In the commodities sector, consolidation at the local level will be unlikely to change substantially the industry dynamics, but Fitch anticipates an increasing trend towards supply-chain integration, with end-users - such as steelmakers and power producers - and middlemen - such as traders and logistics companies - taking larger stakes in mining and other resources assets in a bid to secure raw materials.
This too can already be seen in deals such as the one announced today, whereby Chinese nickel company Gobimin dumped its nickel assets in order to embark on a new business model of becoming a vertically integrated silver marketer and silver refiner to serve China's domestic market.
However, Fitch cautions that the consolidation trend, "by 2012 is likely to have been gradual rather than rapid, constrained in part by the continuing sovereign ownership overhang in many key industry sectors".
What will this do to ratings?
While Fitch is unsure of the exact implications of such M&A activity in the short term, the agency does state that "with an ongoing recovery in commodity prices anticipated as the global economy emerges from recession, Fitch expects cash flows and balance sheets of low-cost producers to recover by 2012.
But, it adds, "any higher financial leverage created by debt-funded acquisitions could be mitigated to some extent by the positive effects of such transactions [such as supply-chain integration or M&A activity] on business fundamentals and prospects. |
